INCOME TAX APPELLATE TRIBUNAL- MUMBAI BENCH 'L'

IT Appeal No. 7543 (Mum) of 2012
[Assessment Year 2009-10]

B.R. MITTAL, JUDICIAL MEMBER AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER

M.P. Lohia for the Appellant.
Mrs. Neeraja Pradhan and Narendar Kumar for the Respondent.

The order of the Bench was delivered by

D. Karunakara Rao, Accountant Member - This appeal by the assessee filed on 21.12.2012 is against the assessment order dated 23.10.2011 passed by the ADIT (IT)-1(2), Mumbai (ie "AO") u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 in pursuance of the directions issued by the Dispute Resolution Panel (DRP) for the assessment year 2009-2010.

2. In this appeal, assessee raised the following grounds which read as under:

3. Assessee is a non-resident foreign company and engaged in the business of 'render of services with respect to diamonds including selling of raw diamonds to Sightholders'. Assessee filed the return of income declaring the income of Rs 28,74,473 (on account of receipts from Forevermark). The return was scrutinised u/s 143(3) r w s 144C(13) of the income tax Act and the assessed income was determined at Rs 1,03,49,31,770/- and net demand raised u/s 156 of the Act is Rs.5,33,83,451/-. AO incorporated the directions of the DRP in making the assessment. The additions made by the include i. receipts from the Value Added Services- VAS; ii. Receipts from Grading services; and iii. Receipts from DTC Accredited Members. Further, the AO applied the tax rate of 15% applicable to the FTS/Royalty in accordance with the provisions of Article 13 of the DTAA Treaty with UK instead of concessional rate of 10% as per the provisions of sub-clause (BB)&(AA) of clause (b) of section 115A(1) of the Act. Aggrieved with the said order of the AO, the assessee filed the present appeal with the grounds imported in the preceding paragraph. Ground wise adjudication is given in the following paragraphs. For the sake convenience, grounds with the common issue relating to the applicable tax rate are clubbed and adjudicated here as under.

4. Grounds 2, 4, 6 & 7 relating to the application of tax rate favourable to the assessee: During the proceedings before us, Shri M.P. Lohia, Ld Counsel for the assessee grouped the above mentioned grounds and stated that grounds 2, 4, 6 & 7 relates to the rate of tax of Rs 15% against the 10% favourable to the assessee on certain receipts namely, VAS receipts, Grading receipts, DTC Accredited Members receipts etc. Further, Ld Counsel for the assessee filed a copy of the order of the Tribunal for the AY 2007-2008 and mentioned that the said grounds stand covered by the said decision of the ITAT. Further, he mentioned that the AO/DRP erroneously applied the provisions of 115(1)(b)(AA/BB) of the Income Tax Act, 1961 when the tax rate of 10% as per the India-UK Tax Treaty, being beneficial to the assessee, should have been applied in view of the provisions of Article 13 of the said treaty with UK. In this regard, Ld Counsel brought our attention to para 10 of the order of De Beers UK Ltd. v. Dy. CIT (Int. Tax) [2012] 134 ITD 697 (Mum.) and mentioned that the AO erroneously charged the tax @ 15% in respect of the Value Added Services (VAS), grading services, DTC Accredited Business Services as Fees for Technical Services and Royalty, income received from Forevermarket. In this regard, Ld Counsel read out the contents of para 10 of the order of the Tribunal. Further, Ld Counsel brought our attention to para 6, 6.1 and 6.2 of the said Tribunal's order and mentioned that the issues and arguments stand applicable and the decision taken by the Tribunal in favour of the assessee becomes applicable to the grounds under consideration.

5. On the other hand, Ld DR dutifully relied on the order of the AO.

6. We have heard both the parties and perused the said para 6, 6.1 and 6.2 as well as para 10 of the Tribunal's order for the AY 2007-2008 and find that an identical issue came up for adjudication by the Tribunal in the AY 2007-08. Like in the present case, AO applied the rate of 15% in accordance with the Article 13 of the India-UK Tax Treaty while charging certain receipts to tax. Relevant facts are available in Para 6, 6.1 and 6.2 of the order of the ITAT, supra and they relate to taxing of "marketing contributions" which are assessed by the AO as royalty. Further the contents of para 10 of the said order relates to taxing of "VAS receipts". Relevant said paragraphs are extracted here as under for completeness of this order.

"6. The dispute raised in ground No.4 is regarding the rate of tax applicable to marketing contributions which have been assessed by the AO as royalty. The AO has applied rate of 15% as per Article 13 of India UK Tax Treaty. The assessee objected to the rate of 15% proposed by the AO before DRP who observed that it was not clear whether the assessee had opted for domestic law or the treaty. It was also observed that in the objections raised, the assessee had mentioned that AO erred in not treating the marketing contribution as royalty under Article 13 of India UK Tax Treaty, and therefore, if the royalty was being considered by the assessee under DTAA, then the rate of DTAA would apply as asessee could not be allowed to apply the law in a piecemeal manner. DRP, therefore, upheld the rate of 15% being proposed by the AO as per the DTAA. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.

6.1. Before us, the ld AR for the assessee submitted that taxability of a sun has to be considered under domestic law as well as under DTAA because in case a particular sum was not taxable under domestic law, it cannot be taxed even if the same was taxable under DTAA. Similarly, if the sum was not taxable under DTAA, the same cannot be taxed even if the same was taxable under the domestic law. Further, the AO had applied both the provisions and had held that the marketing contribution was taxable as royalty both, under the domestic law as well as under the DTAA. This being the position, the rate which is beneficial to the assessee has to be applied under the provisions of section 90(2). It was submitted that rate as per domestic law was 10% as per sub-clause (AA) of Clause (b) of section 115A(1). As per the said provision, any amount received by a non-resident from India as royalty as per agreement approved by Central Government on or after 1.6.2005 is taxable at 10%. In this case, it was pointed out that the agreement was dated 8.11.2005 and therefore, rate of 10% had to be applied. The Ld DR supported the order of the AO and placed reliance on the findings given in the assessment order.
6.2 We have perused the records and considered the matter carefully. The dispute is regarding the rate to be applied in case of marketing contribution which has been taxed by the AO as royalty. There is no dispute that the marketing contributions had been received by the assessee as per agreement dated 8.11.2005 a copy of which has been placed in the paper book at pages 1-22. The AO had treated the marketing contribution as royalty both under the provisions of domestic law as well as under DTAA which is clear from the assessment order. The taxability of income from international transactions has to be considered, both under the domestic law as well as under DTAA because the assessee would be entitled to the benefits of the treaty only if the sum is taxable under the domestic law. In case, the sum is not taxable either under the domestic law or under the DTAA, it cannot be taxed at all. If the amount has been found taxable under both the provisions, the assessee will be entitled to the beneficial rate of tax under the provisions of section 90(2). Since, in this case, the marketing contribution has been received in terms of agreement dated 8.11.2005 which is obviously after 1.6.2005, the tax rate of 10% is applicable under the provisions of sub clause (AA) of clause (b) of Section 115A(1) of the domestic law. We therefore, hold that the marketing contributions assessed by the AO as royalty will be taxed @ 10%."

7. Now the contents of paragraphs 10 of the order of the Tribunal relating to VAS receipts are extracted as follows:

"10. The dispute in ground no. 8 is regarding the rate of tax of 15% applied by the AO to the VAS receipts which had been treated by him as fees for technical services. The AO has applied rate of 15% under provisions of Article-13 of India UK Tax Treaty. The Ld AR for the assessee submitted that concessional rate of 10% is required to be applied under the provisions of sub-clause (bb) of clause (b) of section 115A(1) as the VAS agreement had been entered into by the assesse with the sightholders in July 2005 which was after 1.6.2005 as mentioned in sub-clause (bb). The arguments of the assessee are similar to the arguments advanced in the case of royalty dealt with in the ground no.4 earlier. In view of our decision in para 6.2 of this order, concessional rate of 10% has to be applied if the agreement had been entered after 1.6.2005 It may however be noted that the assessed has not filed the copy of the VAS agreement. It had filed only VAS service Guide which contained the summary of the agreement. The date of agreement, therefore, requires verification. The AO will levy the tax at appropriate rate after verification of the conditions prescribed in section 115A(1). We order accordingly."

8. AO taxed the 'market contributions' and 'VAS receipts' in the AY 2007-08 applying the tax rate of 15% and for this, he relied on the provisions of Article-13 of India UK Tax Treaty. In the process, AO ignored the concessional rate of tax at 10% applicable under the provisions of sub-clause (bb) of clause (b) of section 115A(1) of the Act. Subsequently, Hon'ble ITAT undid the damage caused to the assessee on this issue of tax rate as can be seen from the paragraphs extracted above. Applying the same to the additions made in this AY 2009-10 on accounts of VAS receipts, grading receipts, DTC Accredited Business Services, receipts from Forevermarket etc, we find the grounds have to be decided in favour of the assessee. In principle, AO is under statutory obligation to apply the concessional tax rate as and when the additions if any are made in the assessment. Accordingly, the relevant conclusions of the AO/DRP are set aside and the said grounds 2, 4, 6 & 7 are allowed in favour of the assessee. Now we shall take up the rest of the grounds 1, 3, 5, 8. 9 to 10 in the succeeding paragraphs of this order.

9. Ground no.1 relates to taxability of "receipts from Supply Planning Services" (termed as 'VAS') as Fees for Technical Services (FTS) under Explanation-2 to section 9(1)(vii) Income Tax Act, 1961 as well as under para 4 of the India-UK Tax Treaty and also as royalty under the provisions of para 3 of the Article 13 of the India-UK Tax Treaty. Relevant facts are that the assessee entered into Sightholder Contract 2008-2011 in the name of "Supplier of Choice, Sightholder Contract 2008-2011" (in short assessee described it as SPS agreement). Sightholder Contract 2005-2008 (in short assessee described it as VAS agreement) was in force prior to this period.

10. The SPS agreement (placed at page 1 of PB described as "DTC Sightholders Contract 2008-9011 (Supplier of Choice Agreement)" deals with policy statement, the criteria and considerations, notes to the criteria and considerations, sight terms and conditions of sale for London Sights, sight terms and conditions of sale for Kimberley Sights, conditions for the supply of planning services (SPS) and the service fee, ombudsman terms of reference, guide to the ombudsman, mining competitors policy, mining competitors policy confidentiality agreement, best practice principles. The condition for supply of planning service fees is very significant for adjudication of this ground, as both the Ld Representatives and their arguments rely heavily on the provisions of this document.

11. On the other hand, VAS agreement (placed at page 142 of PB described as "DTC Value Added Services 21st Century Partnership for Growth Services Guide– 2005". The contents of this contract deals with Value Added Services and the Fees. These services include (1) Core Services and (2) Growth Services. The Core Services covers Supply Planning Tools and Business Sustainability. The Growth Services covers Tools for Growth, Business Development etc. The VAS agreement applies up to the AY 2008-2009 and the same was invoked by the AO while making the assessment for the AY 2007 -08 and made additions on account of VAS services receipts holding them as FTS/Royalty. The issue travelled up to the Tribunal, where the views of the AO were upheld and the additions were confirmed by the Tribunal vide the ITA No 8831/Mum/2010 dated 18.11.2011 for the Ay 2007-08 and the Tribunal held that the VAS services receipts received by the assessee under the 'VAS Agreement' constitutes FTS/Royalty.

12. The VAS agreement is not relevant for the AY 2009-2010 and SPS agreement (DTC Sightholders Contract 2008-2011 (Supplier of Choice agreement) is the relevant one for the year under consideration. During the assessment proceedings, AO noticed only the assessee filed only Service Guide 2005 and not the proper 'VAS Agreement -2005-08' and however, he passed the assessment order on 23.10.2011 relying on the said Service Guide 2005. Surprisingly, AO did not refer to the most relevant SPS Agreement - 2008-2011, which should have been actually relied. The 'extracted portions from the said VAS agreement 2005-2008' appeared on page 4 of said assessment order witnesses the mistakes committed by the AO. Thus, the AO relied heavily on the VAS agreement - 2005-2008 instead of SPS agreement -2008 -2011. Eventually, relying heavily on the said order of the Tribunal for the AY 2007-08, AO came to the conclusion that the VAS receipts have to be considered as Fees for Technical Services–FTS and invoked the provisions of Explanation-2 to section 9(1)(vii) of the Act as well as the contents of para 4 of the Article 13 of India-UK Tax Treaty. In the process, the AO/DRP has not studied the nature of the SPS receipts and has not compared the same with the VAS service receipts. Eventually, the impugned SPS receipts of Rs.102,62,21,488/- are taxed by the AO/DRP as the FTS and royalty. Of course, AO considered followed the directions of the DRP as per the statute and taxed the said receipts as FTS and royalty. While computing the tax, AO applied the rate of 15% as per the DTAA Treaty with UK rejecting the assessee's submission for adopting the concessional rate of tax of 10% as per the Indian Income Tax Act, 1961. Aggrieved with the said decision of the AO/DRP, the assessee filed the present appeal vide the ground 1 above.

13. In the background of these facts, Ld Counsel brought our attention to both the contracts ie Sightholders Contract 2005-2008 (VAS Agreement) and Sightholders Contract 2008-2011 (SPS Agreement) and argued that the AO erroneously applied the VAS agreement -2005-2008 instead of SPS Agreement -2008-2011. Bringing our attention to the contents of both these contracts, Ld Counsel mentioned that the VAS Agreement - 2005-2008 deals with (i) Supply Planning Tools (which provides for Continuity of Supply, intention of the ITO, consistency of boxes, Sightholder Extranet Services, SoC integrity, provisions of Key Account Manager (KAM)); and (ii) Business Sustainability (which provides for consumer demand, consumer confident, best practice principles (BPP) leadership). This agreement also provides for Growth Services namely (which provides for tools for growth, sightholder signature, business development services).

14. On the other hand, as per the assessee's consel, the SPS agreement - 2008-2011 deals with Supply Planning Services (SPS), which includes for communication of ITO, consistency of boxes, provision of Key Account Manager, provision of Extranet services, maintaining integrity of Supplier of Choice. As per Sri Lohia, this SPS agreement does not provide for rendering of services relating to business sustainability, growth services, business service development etc which are otherwise provided under the VAS agreement -2005-2008. For substantiating the same, Ld Counsel listed out some of the services relating to marketing growth were discontinued by the assessee as evident from the fact that the assessee booked VAS on the sale of such services offered to tax in the past. Therefore, it is the argument of the Ld Counsel that both these contracts are distinctly different in substance so far as the rendering of services and collection of the fees from the sightsholders are concerned. Therefore, AO has committed a mistake in relying on the VAS agreement 2005-2008 while making the assessment for the AY 2009-2010. In this regard, Sri Lohia categorically mentioned that the SPS agreement is filed before the AO and the DRP. Further, Ld Counsel also brought our attention to page 290 of the paper book and mentioned that this aspect was brought to the notice of the DRP by filing a write up on 6.9.2012, which was not considered by the DRP while issuing the statutory directions u/s 144C(5) of the Income Tax Act, 1961. Further, referring to the clauses pertaining to the SPS Agreement- 2008-2011, Ld Counsel labored before us to demonstrate that the services rendered by the assessee are not akin to the VAS services and they should not be considered as technical services/Royalty. Further, referring to clause 14(4) of the SPS agreement, Ld Counsel mentioned that the said agreement supersedes all the prior contracts if any. Therefore, VAS agreement 2005-08 relied upon on by the AO/DRP is unsustainable in law. Further, Ld Counsel mentioned that the services rendered are not of FTS or royalty and therefore, they are outside the ambit of section 9(1)(vii) of the Act.

15. Additional Evidences: During the proceedings, Ld Counsel filed a paper book (Page no 330-360) and indexed the documents placed in it. Accordingly, the list of the papers are: (i) sample Supplier of Choice Agreement acknowledgement (ii) sample invoices for supply planning services (iii) sample Diamantaire Offer letter - acceptance (iv) invoices for grading services (v) invoices for inscription services (vi) invoices for DTC ABP fee and mentioned that these papers merely strengthen the existing papers filed before the AO and the DRP. As per the assessee, these papers do not constitute additional evidences in its strict sense. However, he admitted to the fact that these papers were not available before the AO and the DRP although they exist at the relevant point of time. Ld Counsel mentioned that he does not want to go into the merits relating to the FTS of the SPS services, considering the fact that the AO and the DRP have not gone into the nature of the services rendered by the assessee. Further, referring to the above stated deficiencies in the order of the AO/DRP, Ld Counsel mentioned that the order of the AO is required to be set aside and the ground 1 needs to be remanded to the files of AO for fresh consideration.

16. Per contra, Mrs. Neeraja Pradhan, Ld Sr AR for the Revenue brought our attention to both the VAS and SPS agreements and mentioned that in substance, the SPS services constitutes VAS services and of course, they are differently worded in the Agreements. Therefore, the SPS services specified in the SPS Agreement - 2008-2011 are like VAS services, which constitutes technical services for which assesse received the FTS/Royalty. Further, Ld Sr AR brought our attention to the order of the ITAT for the AY 2007-2008 and mentioned that the Tribunal already considered VAS and other services and held all of them as technical services. Therefore, the said decision of the Tribunal becomes relevant to the impugned fee received by the assessee for rendering of the SPS services vide the SPS Agreement 2008-2011. Further, Ld DR read out the policy statement of the contract (page 8 of the paper book) and mentioned that the assessee offers "to encourage efficient, value-adding and long-term growth in the diamond jewellery market……….." which has a connotation of commercial information and such information constitutes rendering of technical services. She also mentioned that this kind of information, constituting the intellectual property rights, is accessible only to the sightholders (page 22 of the paper book). Further, Ld DR relied on the contents of page 27, 42, 52 and 59 of the paper book and mentioned that the information offered by the assessee to the sightholders is classified information, it is subjected to verifications, monitoring and violation if any attracts liability clauses of the Agreement. Therefore, such information is not open to general public and therefore, it is exclusively for the sightholdlers' commercial purposes. In that sense, the services rendered constitute technical services and therefore, the fees collected by the assessee constitute FTS or royalty. Referring to page 73 of the paper book, Ld DR mentioned that the other services are also available to the sightholders indirectly by way of Extranet and avails assessee in a way "made available". Further, assessee took the support from the clauses relating to the KAM. Explaining the above observations, Ld DR mentioned that since both the VAS and SPS Agreement are one and the same in spirit and therefore, there is no need to enter into the said SPS agreement - 2008-2011. Ld DR describes the same as the one aimed at tax avoidance with an ulterior motive of not paying taxes on the receipts earned by the assessee from the Sightholders.

17. Referring to the additional evidences, pages 330-360, Ld DR mentioned that the said documents, since dated 9.4.2008, were available to the assessee at the relevant point of time, when the assessments are made or the DRP directions were finalized and they were not filed by the assessee willfully. As these documents were not filed before the AO/DRP, they should not be entertained by the Tribunal at this stage. She filed a copy of the judgments of the High Court of Bombay in the case of CIT v. Smt. Kamal C Mahboobbani [1995] 214 ITR 15 & Velji Deoraj & Co v. CIT [1968] 68 ITR 708 (Bom.) and argued that the additional evidences if any are admitted by the Tribunal u/r 29 of the Tribunal rules 1963 only if after recording of the reasons stating that they are required for adjudication of the issues. Further, there was a discussion on the invoking of the provisions of Rule 29 of the ITAT Rules 1963 and the powers of the Tribunal in entertaining such additional papers. Bringing our attention to the order of the Tribunal for the AY 2007-08, supra, Ld DR read out certain portions from page 257 of the paper book and mentioned that the SPS services constitute FTS and these services are not routine services by allowing the sharing of information by the sightholders in a routine fashion. They constitute 'confidential information of commercial nature' developed by the assessee based on the extensive experience and skill and she also read out the contents of para 7.27 of the order of the Tribunal, supra in support of the above arguments. It is the prayer of Ld Dr that her arguments may be mentioned in the order while remanding the matter to AO's file.

18. We have heard Ld Counsels of both the parties and perused the voluminous paper books placed before us which essentially contain the impugned VAS and SPS Agreements and others documents one side and the additional evidences on the other. On assimilating the arguments of Ld Counsel in the light of the said paper books, we find the stand of the Ld Counsel is that the AO wrongly relied on the expired VAS agreement -2005-2008 instead of analyzing the nature of the services in the light of the new contract i.e., Supplier of Choice contract 2008-2011 ie SPS agreement. The SPS agreement is substantially different in substance from that of the VAS Agreement- 2005-2008. If the services offered by relevant agreement are analyzed microscopically, they are distinctly different in so far as the Core Services and the Growth Services are concerned and SPS services which do not include Business Sustainability and Growth Services makes lot of difference. Considering the same, the conclusions drawn by the AO are consequentially erroneous and therefore, there is a need for re-visiting to the file of the AO. Similarly, the directions of the DRP, which were given without going into the written submissions and the relevant agreements of the assessee, constitute non-speaking in nature. Further, the order of the Tribunal dated 18.11.2011 (supra) for the AY 2007-2008 was also relied heavily by the AO ignoring the fact the Tribunal is decided the grounds based on an expired Sightholders' contract 2005-2008 ignoring the truth that same is inapplicable to the AY 2008-2011 under consideration. If this line of argument is appreciated, there is a need for examining if the SPS constitutes VAS and if these services constitute 'technical services'. Neither the AO nor the DRP has gone into these core aspects of the issue unfortunately. Therefore, it is the prayer of the Ld Counsel that the order of the Tribunal for the AY 2007-2008 is not applicable to the facts of the present case and hence, considering the additional information made available now, there is a need for re-visiting the files of the AO for de novo assessment on this issue.

19. Per contra, the case of the Revenue is that the SPS services offered by the assessee vide sightholders contract 2008-2011 are in a way akin to the VAS services offered under the expired sightholders contract 2005-2008. In this regard, Ld DR traced certain comparables clauses, the details of which are already discussed in the preceding paragraphs of this order and mentioned that the order of the Tribunal relevant for the AY 2007-08 becomes applicable to the present AY too. Considering the similarity of the services offered by the assessee indirectly through Extranet Services, the contents of the current agreement which are worded differently should not make any difference so far as conclusions of the Tribunal for AY 2007-08 are concerned. Therefore, as per the Ld DR, the order of the Tribunal for the AY 2007-2008 (supra) stands applicable to the current AY 2009-2010.

20. On examining the divergent stands of both the parties, we find, it is an undisputed fact that SPS agreement 2008-2011 is filed by the assessee before the AO/DRP at the relevant point of time. It is our finding of fact that the lower authorities have considered only the expired VAS agreement 2005-08 for unknown reasons. It is both surprising and unfortunate that AO/DRP, who are specially chosen to for making of these specialized assessment involving international transactions, have ignored the basic fact of applying the appropriate SPS Agreement 2008-11 for the AY 2009-10. The fact is that the Revenue Authorities have not examined the issues and not made the additions of this magnitude in the light of the correct contract with Sightholders. It is surprising to notice despite the supply of the relevant contract 2008-2011 to the AO, the relevant assessment order refers to the provisions of the old contract with Sightholders and contents of para 3 of page 4 of the assessment order witness these basis avoidable mistakes. There is no discussion either in the order of the AO or in the directions of the DRP to the nature of impugned SPS services or homologous nature of these services to the VAS services. If they are comparable to VAS services, how the other Core Services or Growth Services specified in the old contract are impliedly made available indirectly through the Extranet Services allowed under the new contract. It is also required that the revenue ought to have explained on the discontinued services since the old contract with the Sightholders. It is explained before us that the assessee stopped supplying services relating to marketing and growth related areas of the business. In our opinion, it is for the AO and the DRP to come to the fresh conclusions on a quality of services rendered by the assessee under the new contract and they constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. As such Sri Lohia has not deliberated adequately on the technical nature of the impugned SPS services and they shall be dealt with before the AO during the remand proceedings.

21. Regarding the additional evidences furnished by the assessee, we find that the same are letters of acknowledgements of the Supply of Choices of the contract by the sightholders and copies of the invoices in support of the rendering of grading and other services and in our opinion, they shall only add value to the existing documents filed before the lower authorities. Considering the request for setting aside, it is the interest of the justice that these documents should also be considered by the authorities below while adjudicating the issue afresh. Therefore, we admit the same as per the discretionary powers provided by Rule 29 of ITAT Rules, 1963. These papers will make a contract complete and has effect of curing all the lacunas with regard to the completeness of the contract of the assessee with the sightholders. Considering the above, we are of the opinion that the conclusions of the AO and the DRP are set aside and the issues are remanded to the files of the AO for de novo assessment in this regard. Regarding the arguments relating to the 'make available' clause, we find that the order of the Revenue is very scatchy and in our view, the same do not fall under the category of speaking order. There is need for revisiting the AO on this aspect too. Therefore, relevant findings of the AO/DRP are set aside. During the set aside proceedings, the Revenue Authorities shall pass an appropriate speaking order attending to all the arguments put forth by the assessee or his Counsel. The AO shall grant a reasonable opportunity of being heard the assessee during set aside proceedings. Accordingly, and ground no.1 is remanded to the AO for de novo adjudication.

22. Ground no.3 relates to the treating of the receipts from 'grading services' as 'royalty' under para 3 of Article 13 of the India-UK Tax Treaty. During the year, assessee earned 'grading fees' of Rs. 4,00,703/- under the Agreement named "Diamantaire Agreement 2008". Copy is placed at page 174 to 212 of the paper book. Under the agreement, assessee rendered the services of grading the diamonds based on 4-C's (Colour, Clarity, Carat and Cut). The agreement also enables rendering of 'inscription services'. During the assessment proceedings, assessee categorically submitted that the said earning has nothing to do with the 'inscription' services. As per the assessee, the earnings for inscription services (providing inscription of 'trade mark' on the diamonds) are separately accounted and offered to tax. Regarding the grading services, it is the claim of the assessee by providing such services, it does not make available any know-how or process of grading to its Diamantaire.

23. The stand of the Revenue on this issue is that such services of grading of raw diamonds is of very high and intricate in nature and the issue of certifying is not of a routine nature as it involves VAS commercially. It is the assertion of the AO (para 8 of the assessment order is relevant here) that the assessee also renders services of inscription on the graded diamond items and it involves transfer of intellectual property rights/trade mark. Of course, this aspect was strongly opposed by the Ld Counsel mentioning that the impugned receipts have nothing do with inscription services. It is the claim of the assessee that the inscription services rendered are distinctly different from grading services and such inscription fees received from the inscription services are separately accounted and offered as taxable income. Otherwise, the fees for grading services do not amount to royalty under Article 13 of the India-UK Tax Treaty.

24. During the proceedings before the DRP, assessee made elaborate submissions against the observation of the AO and argued stating that the grading services provided by the assessee does not amount to transfer of any commercial experience for attracting the provisions relating to royalty under the treaty. Finally, the DRP dismissed the submissions of the assessee providing the below mentioned discussion vide para 6.3 of the DRP order which read as under:

"6.3. We have considered the AO's order and the assessee's submissions. Considering the nature of the services rendered, we agree with the AO that these services were rendered under 'Forevermar Diamantaire Agreement'. We see that the diamonds processing under this agreement involves grading of the diamond based on which the identification processing under this agreement involves grading of the diamond based on which the identification card for every Forever mark diamond so inscribed. In this process it allows use of trade mark 'forever Diamontaire' and thus the services will fall under the category of royalty. Further, the AO is also correct in holding that this process also leads to transfer of commercial experience under para 3 of the Article 13 of the Treaty. For the peculiar facts of the assessee's case the decisions relied upon by the assessee are found to be distinguishable. In this light, we find the AO's treatment of grading services as royalty under Article 13 of the Treaty correct and uphold the same."

25. During the proceedings before us, Ld Counsel took objection to the above finding of the AO and the DRP about the mixing up of the grading services and inscription services. In this regard, Ld Counsel brought our attention to pages 277 to 282 of the paper book, Annexure-2, and mentioned that the inscription services which constitute Rs. 28,74,473/- was offered to tax as income from business or profession. Referring to Annexure-3 and Note 2 to the computation of the total income placed at page 277 of the paper book, Ld Counsel mentioned that by rendering the grading services, assessee does not make available any knowledge, Know-how, experience or skill to Diamantaire and therefore, the grading fees will not be liable to tax in India. Further, Ld Counsel also brought our attention to the contents of the contract placed at page 175, 180, 202 of the paper book, which deals with the inscription and grading services. He also read out the definition of the grading services as provided in the contract. Finally, bringing our attention to the paper book page nos. 346 to 353 (these are invoices), Ld Counsel mentioned that the grading services are separately invoiced. Regarding the nature of the additional evidence of these papers, Ld Counsel mentioned that these facts were not requisitioned by the AO or the DRP, therefore, the same are not filed at the relevant point of time. Further, Ld Counsel filed a copy of the order of the Bombay High Court in the case of Diamond Services International (P.) Ltd. v. Union of India. [2008] 304 ITR 201 and mentioned that grading services do not fall within the meaning of royalty under the Article 12 of the India-Singapore DTAA. Of course, he mentioned that this is a case of payer unlike the assessee who received the fees for grading services. Further, Ld Counsel mentioned that if the Tribunal is of the opinion that the matter requires re-examination in view of the additional evidences and the above cited Bombay High Court judgment for analyzing the facts, the matter can be referred to the files of the AO for fresh adjudication.

26. On the other hand, Ld DR heavily relied on the order of the AO/DRP directions extracted above. Referring to the above cited judgment of the Bombay High Court, Ld DR stated that the said decision is distinguishable on facts. Regarding the additional evidences, Ld DR mentioned that they were submitted before the Tribunal for the first time which should not be allowed at the stage. In this regard, Ld DR relied on the order of the Bombay High Court in the case of Smt. Kamal C. Mahboobbani (supra).

27. We have heard both the parties and perused the relevant agreement with Diamantaires on the issue of grading services if they include the inscriptions services and involve transfer of the known how, skills etc to constitute royalty. The case of the assessee is that the fees of Rs. 4,00,703/- is received only in connection with the grading services and it does not include the services of the inscription on the diamonds. As per the assessee, mere issue of a 'certification' about the 4C's, no 'trademark' rights is made available to the customers. It is the claim of the assessee that Revenue Authorities have erred in mixing up both the services and make to the conclusion that grading services constitute technical services attracting FTS/royalty provisions. It is the assertion of the Ld Counsel that the fees received for inscription services were duly offered in the return of income as FTS/royalty. Therefore, the grading services are devoid of any services of inscriptions on the diamonds and therefore, they are not technical services for becoming eligible to attract the provisions of FTS. In this regard, the assessee filed certain invoices in the form of additional evidences to demonstrate the above facts for the first time before us. As per the assessee, these papers were not asked for by the AO, therefore, they were not filed. We find no reason to disbelief the arguments of the assessee in this regard. In our opinion, considering the provisions of Rule-29 of the ITAT, admitting these papers would help for passing a proper assessment order and will enable Assessing Officers to go into the facts in the right perspective as to whether the grading services include inscription services or not. Accordingly, we set aside the order of the AO and the DRP on this issue and remand the matter to the files of the AO for fresh adjudication after considering the additional evidences and the decisions of the Bombay High Court in the case of Diamond Services International (P) Ltd (supra), wherein it was held that the grading fees paid by the assessee to Gemological Institute of America (GIA) for the activity of certification and grading of diamonds, do not fall within the expression "royalty" under Article 12 of DTAA. Accordingly, ground no.3 raised by the assessee is set aside and during the set aside proceedings, assessee shall be granted a reasonable opportunity to put forth its point of view.

28. Ground no. 5 relates to the treating of the "receipts from DTC Accredited Business Programme (DTC-ABP)" as FTS and royalty under Article 13 of the India-UK Tax Treaty. Relevant facts are that the assessee entered into a contract with DTC-Ex-Sightholders and the Accredited Business who ceased to be the sightholders of DTC as on 30.3.2008. As per the agreement of DTC-ABP, the assessee offers to its accredited business partners (i) to contact the DTC to discuss commercial and industry matters of public nature and for this members gets an opportunity to attend business meetings once a year; to call themselves as accredited DTC business, supply support material for business promotion and provide help to the Forevermark Diamantaire and contents of para 2 of the proposed agreement dated 11.6.2008 is relevant. It provides for sharing of the commercial knowledge and experience of the assessee with them. However, as per the assessee, there is no transfer of its expert knowledge and skills to the Accredited Business Partners. Assessee argues that the fees received is of routine nature and therefore, receipts received by the assessee should not be labeled as FTS/royalty. As per the assessee, it does not make available of any knowledge, know-how, experience, skill etc. The Revenue did not accept the above explanation of the assessee and held that the services rendered under the DTC-ABP agreement constitute an extension of VAS. As per the AO, these services are not open to all and sundry and it is open only to the former sightholders and also to those who could not make it to the list of current sightholders of DTC. Considering the fact that assessee supplies support information and material, which constitutes commercial experience and knowledge, the fees received is held as royalty by the AO/ DRP. As per the Revenue, this information is made available" to the commercial benefits of the ABPs and hence the same constitutes technical in nature and it fulfills the criteria of 'make available' Therefore, the fees received by the assessee from the ABPs would constitute FTS and royalty. Aggrieved with the same, assessee is in appeal before the Tribunal.

29. During the proceedings before us, Ld Counsel for the assessee brought our attention to the agreement in a letter-format dated 11.6.2008, which was stated to be subsequently acknowledged by the ABPs and submitted that the AO and the DRP have not analyzed the details of the services offered by the assessee in a correct perspective. In fact they have mechanically treated these services as 'extended services of VAS' to the non-members of the Sightholders list. Ld Counsel mentioned that the AO failed to consider the SPS services offered to sightholders under the SPS Agreement - 2008-2011 in a correct perspective and therefore, his conclusions as so called 'extended services of VASare erroneous and requires revisiting for fresh investigation and analysis. The services offered by the assessee are neither VAS services nor the extended VAS services. Ld Counsel also mentioned that the VAS services raised in ground 1 since set aside, these extended VAS should also be set aside and remanded to the AO for concerted decision on VAS-SPS services and also the extended VAS.

30. On the other hand, Ld DR relied on the order of the AO.

31. We have heard both the parties on the issue of treating of the receipts from DTC Accredited Business Programme (DTC-ABP) as FTS and royalty under Article 13 of the India-UK Tax Treaty. We find that the services rendered by the assessee are unconnected to the VAS/SPS services as discussed in ground no.1 of the appeal. On examining the arguments, we find that the adjudication of this ground has a bearing on the conclusion of the ground no.1 of the appeal. Considering the connection of issues and the conclusions on ground 1 and ground 5, we are of the opinion that this issue should also be remanded to the files of the AO for fresh adjudication. Accordingly, relevant conclusions of the AO /DRP relating to ground no.5 are set aside and the said ground is remanded to the files of the AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee.

32. Grounds 8 and 9 relates to the mandatory interest u/s 234A and 234B of the Act. It is admitted fact that the said sections are put into service by the AO in view of the additions made in the assessment. In effect, these are consequential in nature and the levy changes with the variation in total income assessed by the AO. Nevertheless, with regard to the levy of interest u/s 234HB of the Act, it is the argument of the assessee that the assessee's case is fully covered by the TDS provisions and therefore, even with change of assessed income, no interest u/s 234B should be charged. In this regard, Ld Counsel relied on the jurisdictional high Court's judgment in the case of DIT (International Taxation v. NGC Network Asia LLC [I.T. Appeal No. 1037 of 2008, dated 14-1-2009] apart of many others. In this regard, he also brought our attention to the contents of para 13 of the order of the Tribunal for the AY 2007-8, supra and read out the direction of the Tribunal to the AO in this regard. Ld DR rely on the order of the AO.

33. We have heard the parties on these issues relating to levy of interests u/s 234A and 234B of the Act. So far as 234 A is concerned, it is admitted fact that the said levy is consequential in nature. Accordingly, considering our conclusions of remanding on the impugned additions, the assessee gets consequential relief and therefore, we direct the AO. Accordingly, we decide the ground 8.

34. Regarding the levy of interest u/s 234B of the Act, we have heard the parties and perused the cited binding judgments. On this issue, the ratio of the cited judgment in the case of NGC Network Asia LLC (supra) reads,-

"we are in respectful agreement with the view taken in the case of CIT &Anr v Sedco Forex International Drilling Co Ltd, by the Uttaranchal High Court. We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee assessee"

35. Further, we have also perused the contents of para 13.1 of the order of the Tribunal in the assessee's own case for the AY 2007-08 and the same is reproduced here as under in view of its relevance.

"13.1. We have perused the records and considered the matter carefully. The dispute is regarding levy of interest for shortfall in payment of advance tax. The advance tax payable under section 208 is required to be computed under section 209 and as per section 209(1)(d), the tax payable by the assessee has to be reduced by the amount of tax deductible or collectible at source. Therefore, once the tax is deductible, the same has to be reduced from tax even if the tax had not been actually deducted. In this case, additions had been made by AO on account f royalty and FTS which are subject to deduction of tax at source under section 195 of the Income Tax Act and therefore, the tax deductible in relation to the said income has to be reduced from the tax payable as advance tax even if no tax had been actually deducted. This view is supported by the decision of the Mumbai Bench of the Tribunal in the case of DIT (Intl. Taxation) v. NGC Net Work Asia LLC (313 ITR 187) and in case of Jt. Director of Booz Allen & Hamilton Inc. . Respectfully following the said decisions, we hold that while computing advance tax payable for the purpose of computation of interest under section 234B tax deductible at source in relation to royalty and FTS will have to be reduced. The AO is directed to act accordingly."

36. Therefore, in our opinion, the above decision of the Tribunal is squarely applicable to the ground 9 of the appeal. Assessee being a non resident, the duty is cast on the payer to pay the tax at source and on failure, no interest u/s 234B of the Act is imposed on the payee-assessee. Accordingly, we direct the AO to reduce the relatable interest u/s 234B of the Act. Accordingly, ground 9 is allowed in favour of the assessee.

37. Ground 10 relates the initiation of penalty proceedings u/s 271(1)(c) of the Act and DRP dismissed the same as not maintainable and held that the same does not relates to the variation in income. After hearing both parties, we also dismiss the same as the same is merely against the initiation of the penalty proceedings and no penalty is actually levied. Accordingly, the ground 10 is dismissed.

The order pronounced in the open court on the 4th September, 2013.